Summary:

• Giuseppe Conte will seek a confidence vote for his government ending almost 3 months of political uncertainty
• Spanish PM Mariano Rajoy is likely to be ousted as opposition parties garner a sufficient majority to vote against him
• A bunch of macroeconomic releases during Asian hours trading

It’s been an incredible week when it comes to Italian politics, and all in all it is going to end in no elections at all. Yet three days earlier everybody was talking about a date when elections may take place, but right now it looks that a 5SM/League government will be finally forged. President Sergio Mattarella asked little-known law professor Giuseppe Conte on Thursday to be a prime minister and this time he agreed (it was a second try). Conte was collaborating with the 5-Star Movement during the latest elections and he was strong backstop from both the 5SM and the League. There were already some leaks as for new ministers in a new government expected to be sworn in this afternoon. Among those names we were already offered 5-Star leader Di Maio is going to be Labour and Industry minister as well as deputy PM. League chief Salvini is going to lead Interior Ministry and also be deputy PM. The Foreign Ministry is to be led by Moavero Milanesi, and Economy Ministry is going to have economics professor Giovanni Tria as its leader. Notice that Tria is reportedly viewed by markets as pro-European, hence in theory it could be a EUR positive choice. After swearing-in a new government led by Conte will seek a confidence vote, but it should be quite an easy task as 5SM and League have jointly a majority in both houses.

Does it mean an end of political tailspin there? Let’s be honest, yet before the March elections such a government was among the least desirable combinations, but then markets realized better to have any government or no government at all. Really? The Italian debt market was continuing to settle down on Thursday with yields on the 2Y note falling roughly 60 basis points to just slightly above 1%. The 10Y yield tumbled alike. However, the entire curve remains elevated compared to the yields seen a week ago suggesting political risks have yet to subside. On that account there was no a rally on the euro even as the greenback was influenced by tariffs put forward by the Trump administration yesterday coming into effect already today (levies concern the EU, Canada as well as Mexico – all countries said they will retaliate before long).

Anyway, the euro saw a major bullish engulfing earlier this week being drawn nearby a crucial demand zone. Therefore, one may expect it may have been a tipping point, and the final end of the US dollar surge. However, one needs to wait for the end of this week as today’s NFP could roil markets anew. Source: xStation5

Euro investors could be concerned not just by Italian woes, but also by Spanish internal clashes. Let us recall that a no-confidence vote against PM Mariano Rajoy was already proposed last week by Socialists, but then they lack enough votes to do so. Things have changed since then, and currently it looks like Rajoy could be ousted later today. The final nail to his coffin came from Basque Nationalists having just 5 seats in the parliament albeit these votes were needed to get a majority. According to the latest news Socialists, Podemos, Catalans and Basque Nationalist have jointly 177 votes (one more than needed for a majority), and should there are no outliers during a no-confidence vote this afternoon Mariano Rajoy shall be forced to step down. If it happens, Socialist leader is to have sufficient backstop to become new PM.

The Italian FTSE MIB (ITA40 on xStation5) bounced off its local support area giving hopes for bulls to see a larger increase when political risks slightly abated. Source: xStation5

Finally, let’s sump up the Asian session which brought modest moves across equity markets. In terms of macroeconomic readings it’s worth mentioning weaker then previously Australian PMIs (both AIG and CBA) weighing on the Aussie in the morning. On top of that, Chinese official manufacturing PMI came in at 51.1 subtly missing the consensus and making no change in comparison to April. Last but not least, the NZ terms of trade marked its first decline in a year and a half dropping 1.9% qoq chiefly on the back of lower dairy prices, the NZ dollar was not afflicted though.